Lynn Tilton Patriarch Partners Seeks Bankruptcy Protection for Zohar-I Fund
Lynn Tilton arrives for an appeal hearing at the U.S. District courthouse in New York in September. PHOTO: REUTERS
Lynn Tilton’s Patriarch Partners XV LLC on Sunday filed involuntary chapter 11 bankruptcy petitions against Zohar CDO 2003-1 Ltd., a part of her investment operation that has been caught up in a fight with bond insurer MBIA Inc.
Ms. Tilton invests in troubled companies, then bundles loans to them into packages that are sold to investors. The Zohar-I fund that is the subject of the involuntary bankruptcy filing dates back to 2003. It is packed with loans to distressed and restructuring businesses, which are managed by Patriarch.
In a filing with the U.S. Bankruptcy Court in New York, Patriarch said it holds $286.5 million worth of debt issued by the fund, dubbed Zohar-I, and seeks court protection “from the fraudulent efforts of a more senior creditor, MBIA.”
In a statement Sunday, MBIA Insurance Corp. said it had honored its insurance obligations Friday on the insurance policy for the Zohar-I CDO, which had suffered a payment default. MBIA said the involuntary bankruptcy proceeding is “a desperate and transparent effort to deflect attention and blame.”
Companies that are the subject of involuntary bankruptcy filings have an opportunity to counter the allegations used in an effort to force them into court protection.
“MBIA intends to vigorously pursue its rights and remedies, and at the same time continue its efforts toward a global restructuring of all the Zohar transactions in order to maximize recoveries for itself and other investors,” the insurer said in the statement.
In court papers, Patriarch said it fears MBIA will deal with Zohar-I in a way that will damage the rest of Ms. Tilton’s investment funds. It is asking for court permission to file a reorganization plan that it says will pay MBIA.
MBIA and Patriarch have been disputing the proper maturity date for Zohar-I, which is part of Ms. Tilton’s $2.5 billion collection of collateralized-loan-obligation funds—pools of corporate loans made or purchased with investor funds.
In bankruptcy court papers, Patriarch’s lawyers said MBIA is the “controlling party” of Zohar-I and has exclusive authority over its assets. Patriarch said the involuntary bankruptcy filings are designed to allow it to have a say in the restructuring and to protect Patriarch’s Zohar-II and Zohar-III funds from fallout over MBIA’s alleged “scheme.”
Zohar-I and Zohar-II are linked by holdings in some of the same businesses, the court papers said. If MBIA subjects Zohar-I’s assets to a “fire sale,” MBIA may be in position to require restructuring of some of those businesses on terms that aren’t favorable to Zohar-II and its investors, Patriarch’s lawyers wrote.
MBIA called the allegations “utterly baseless.”
Separately, Ms. Tilton has been battling fraud allegations filed by the Securities and Exchange Commission, questioning her management of the funds. She denies wrongdoing. The SEC has said many of the companies in which Patriarch invested are doing poorly.
In addition to Zohar-I, Patriarch filed involuntary bankruptcy petitions for Zohar CDO 2003-1 Corp. and Zohar CDO 2003-1 LLC.
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